What You Need to Know About the 401k Real Estate Investment Rules

One of the best reasons for having a 401k retirement plan is the ability to use it to invest in real estate. Over time, real estate has been an excellent investment because property values have increased exponentially over time. Certainly, there are better times to invest in real estate and others, but right now is an ideal time, which is why you should learn the 401k real estate investment rules as soon as possible. You want to take advantage of the benefits available to you so that your future can be more financially secure.

Your 401k plan is part of the Profit Sharing Plan section of the Internal Revenue Code. This section is what allows you to defer your retirement savings on a pre-tax basis. Employers often make this kind of retirement plan available to their employees to assist them with their retirement savings. While there are limits to how much you can contribute to your plan each year, the best part of a 401k plan is that your employer is able to match your contributions up to a predetermined percentage. You are able to contribute up to 20 percent of your annual salary to a maximum of $9,500 per year. Employers can match your contributions up to 8 percent of your total yearly salary.

In addition to the employer match feature of 401k plans, there is also a great amount of flexibility that allows your employer to give you the option of self-directing your funds. Not every plan offers this feature, but if yours does, this is how you will be able to use your 401k funds for real estate investments. Even if your plan does not currently have a self-directed option, it can be amended easily so that it does. You will have to talk to your employer, but once self-direction is available, you can start to take advantage of real estate benefits.

The Rules for 401k Real Estate Investment:

The rules governing the use of 401k funds for real estate investment are not complicated. There are basically three rules that make sure you do not have a conflict of interest when making real estate transactions with your 401k funds. In addition, you have to make sure the real estate transactions you make are not prohibited by the Internal Revenue Service. The three basic rules for 401k real estate investment transactions are:

You can only purchase assets that are not prohibited by the IRS. In general, real estate is not a prohibited asset.

All real estate transactions must be at arm’s length. This means that your transaction must be one in which the sellers and you act independently. This rule is meant to ensure that you are dealing in your own self-interest and are not under any duress from the other party.

You may not make any transactions with members of your own family, with the exception of your siblings.

These rules allow for the purchase of mortgages with your 401k funds, which means you can purchase real estate using your 401k account. In fact, you can use your retirement funds to purchase real estate properties as much as you want. You might want to purchase fixer-uppers to repair and sell at a profit. Or, you can purchase discounted notes or rental properties to provide an income stream. You have many options available to you as long as you follow the 401k real estate investment rules.

The Real Estate Investment Process Using Your 401k:

Once you are sure your 401k plan allows you to self-direct your funds, you can begin the process of making a real estate investment. Be aware that you are not going to be given a list of real estate properties available to you. It is up to you, as the owner of the 401k account to find the property or note you want to buy. You should also keep in mind that you are assuming all associated risks of investing in real estate, but you are also going to receive all the benefits of such an investment.

After you locate the property you want to buy, simply make a request to your plan’s administrator to ask the plan’s trustee to purchase it with your funds. This process is all done through written communication so there is a concrete record of your purchase. The trustee will ensure all the paperwork is in order and will make the purchase. At that point, the funds you use to purchase the real estate will be deducted from your 401k account.

Again, using your retirement funds to purchase real estate is a great option, particularly right now when the market is improving. You have the opportunity to increase your retirement income and funds through your own self-directed actions. If you have never considered a 401k real estate investment before, perhaps now is the right time.

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